IPOs: Tencent Literature IPO Nears Take-Off, But Will It Read?

Bottom line: China Reading's IPO should be
well received when it launches its road show as soon next week, and
the shares should price and debut strongly on its good profit
margins and growth prospects.

China Reading set to launch IPO road show

Another hot IPO with ties to one of China's leading Internet
firms is nearing the starting line, with word that the highly
anticipated listing for Tencent's(HKEx: 700) online
literature unit is finally going to kick off shortly. That means we
will finally get to see some financials for China
Reading, whose plans for an $800 million IPO have been
discussed since as early as February.

In fact, this particular IPO has been discussed for far longer than
that, since the company has gone through a number of forms in its
long march to market. I'll recount that shortly, but will begin
with some quick thoughts on this offering's chances for success.
We've already seen in this burgeoning IPO season that having a
pedigree from a name like Tencent doesn't guarantee success, as was
the case with Alibaba-backed logistics firm Best
Inc. (NYSE: BSTI). That IPO priced miserably due to stiff
competition in the logistics space, and the stock is only up a
modest 6 percent since it started trading in New York.

But then there's another IPO, online
insurer ZhongAn (HKEx: 6060), that has an even
better pedigree, with backing from Alibaba, Tencent and also
financial services giant Ping An. That offering priced quite
strongly, and has zoomed since then, up around 50 percent from the
offering price to be precise.

It seems that China Reading probably lies somewhere in between
those two, and I'll give my view shortly on where exactly it may
end up. But first let's review the latest headlines, which say that
China Reading plans to seek formal approval from the Hong Kong
stock exchange later this week for its IPO to raise between $600
million and $800 million. (Chinese article) The fund raising amount isn't changed
from previous reports, which all along have said the offering could
raise up to $800 million.

If the stock exchange approves, then China Reading would kick off
its road show next week, and we would probably see it make its
trading debut within a month of that. The only other detail in the
reports says that China Reading's shares have been distributed
among various investors by now, which was also always part of the
plan.

Complex History

With all those latest developments covered, we can backtrack
quickly and briefly discuss the somewhat complex history of this
offering. The current company actually started off as the
literature unit of the now-disbanded online entertainment empire
of Shanda Group. In that part of its life it tried
to list in New York several times, but failed, and finally the
company fell apart after a big group of its middle and top managers
split off and formed a rival that is the current China Reading.

Shanda took legal action, even as Tencent backed the new company,
and the current China Reading is the result of a final settlement
that took the company out of legal limbo. The company had always
intended to maintain its autonomy, despite its Tencent backing.
That's why we're seeing this spin-off that's a bit unusual for
Tencent, which doesn't typically do separate listings for its
various units.

All of that said, we still need to see some financials before we
can say how well or poorly this listing will do. My understanding
is that the company is quite profitable and the clear leader in its
class, which are both good signs. The fact of the matter is that
there is quite a market in China for this kind of literature,
namely bite-sized novels and other literary works catering to
today's fast-paced world of people who read mostly on their
smartphones and other e-reading devices.

The fact that this would be the first in its class to market should
also bode well for China Reading, as that was probably a key factor
behind ZhongAn's success as the first major IPO by a new generation
of China fintech companies. So unless we see some disappointing
financials when the company files its prospectus, I would expect to
see some healthy demand for China Reading when it finally comes to
market. That should allow it to raise the full $800 million it is
targeting or perhaps even more.